Business Valuations
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“Go Green!” There is a big push in our office to work in an environmentally-friendly manner – from turning out the lights after leaving an area, to recycling pop cans, to our Real Estate and Construction niche group members obtaining Green Advantage Commercial/Residential (GACR) certifications. Regardless of whether global warming is a real or make-believe phenomenon, the concept of making more efficient use of the resources that we currently have will only continue to grow as the world’s population increases. As the “green” movement was finding its roots a number of years ago, I remember hearing the phrase “reduce, re-use, recycle.” In the world of business valuation, does the same mantra hold true?

The answer – it depends. Three major areas that must be considered before relying on the value indicated by an old business valuation are as follows:

Changes in the Company, Economy and Industry – Depending on the length of time between the original valuation date and your current date, there may have been significant changes in the Company and its future prospects. Has the Company grown or shrunk since the last valuation? How does the economic and industry outlook as of the current valuation date compare to that as of the original report date. Even moderate changes in any of these areas could have a significant impact on value.

Standard of Value – If a different standard of value is necessary for the current valuation, the value indicated by the original report may not be suitable for use. For example, if the original report was based on “investment value” for a potential acquisition and the more current analysis needs to be at “fair market value” for gift tax purposes, the old report will not likely be useful for the current purpose.

Level of Value – An “apples to apples” value may not be obtained if the original valuation was prepared on a controlling, non-marketable basis and the new valuation must be a non-controlling, non-marketable basis. Differences in value due to lack of control and lack of marketability discounts often reduce the pre-discount value of a company by 30%-50%. Unless adjustments are made to account for a different level of value, the value relied upon may wildly overstate or understate that of the current ownership interest.

Considering the rapidly changing economic climate over the past few years, there are few, if any, older valuation reports that are still relevant today. However, a good rule of thumb is that the more recent the prior valuation was performed, the more likely that has any relevance/reliability now. Be aware that most, if not all, valuation reports contain disclaimers that they are not valid for any purpose or date other than those specifically identified in the report. Therefore, if you do rely on an older valuation report to provide a current indication of value, be prepared for the expert who prepared the original report to not provide his support for the value as of the new date (unless he possibly performs additional procedures and updates the value if necessary). If you are in a position where you are thinking about re-using an older valuation report, talk with a valuation analyst and get a feel for how the value indicated in the original report may or may not apply now – there is a strong likelihood that it is likely that it may be too stale to re-use.